How I think about debt
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I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered.
If I had decided not to leverage several hundred thousands of dollars of debt, then yes I'd have more cash directly now, but I might have suffered the fate that lots of others faced with the recent spikes in rent that have happened due to COVID. I simply didn't have to worry about that.
Obviously there's different types of debt; some insanely high-interest loan you get from a payday loan place absolutely is a bad and will hurt your ability to stand volatility.
I also have a mortgage on my apartment and I also think it's a decent choice, especially considering that I'll have less income after retirement. But most people are only a couple of bad turns in life away of losing everything they own.
All in all, I'd say the way to think this article presents does hold up to mortgage as well.
Unless you live in a no-recourse state, where they can't take everything else.
In AZ, CA, TX, WA, and a handful of other states, banks can't go after your other assets, just the house that's mortgaged.
There is also a similar process, non-judicial foreclosure[0], which is similar to non-recourse in some ways, but not for tax purposes (e.g. cancelation of debt income).
[0]https://www.nolo.com/legal-encyclopedia/how-foreclosure-work...
The bigger impact, I believe, is that housing prices can go more crazy. People will take more risk if they know they can walk and leave the bank holding the bag, so there isn't that limiting factor on prices.
(Though I suspect, but obviously can't confirm, that the effect from non-recourse mortgage is absolutely dwarfed by other factors, especially out here on the west coast where we have very restrictive zoning policies, weaponized environmental policies inside urban areas, etc)
Yes, and they'll sell the house to cover the debt. But the amount they receive from selling the house in excess of the debt goes to you.
I.e. you'll get the equity portion.
It's in your mortgage contract. Worth reading.
And now you're homeless and with your equity you cannot acquire capital. Your credit is also tanked due to the default...
Remember, most people do not own multiple houses and having no stable address can really mess you up legally even.
I don’t feel convinced that having a mortgage debt is that much worse than not having one, if you lose your job and war and other bad things.
With a recourse mortgage, they can go through normal debt channels (including wage garnishment, etc).
Specifically, I'm asking if the mortgage deals the poster above was discussing would help if the house is now worth less than the mortgage.
the point is there is alway risk and many different situations. depending on details there are different results.
This is new. Mortgages in the US traditionally took just the home as collateral. Thanks for the reminder that this is now a thing to look out for, as I may need to borrow one more time than I ever expected.
This is wild. In Canada not only do we all take interest rate risk every 5 years maximum as we can’t lock in for longer (which seems to make our whole society less robust), we can’t refinance early if rates drop without massive penalties eliminating any incentive to do so, but all of our mortgages are full recourse.
I can’t believe how much worse this seems, on a societal level, than the US.
Except in Saskatchewan and Alberta [1].
[1]: https://financialpost.com/personal-finance/mortgages-real-es...
This worked out fine when interest rates dropped and I refi'd. I've refi'd many times whenever the interest rate dips :-/
And those do not have such nice terms either.
You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive.
By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability
The market needed a way to transfer this risk (risk of delivery) so prices went negative meaning you were paid to find a place for the oil.
It's really neat actually and shows how almost all of the financial system is really a big "risk transfer" mechanism.
I suspect it has or will soon reach the point where the Kelly criterion says mathematically I'd be better off to self-insure - if I didn't have a bank loan.
It's not just insurance (which is likely also weather-related); after a fluke super-cold Winter we had, our natural gas companies incurred a huge wholesale market bill which they've passed on to customers. I have a family member who owns his house free and clear whose gas bill went up so much he could no longer afford to heat his house. The gas company still tried / is trying to assess a one-time very large retroactive fixed fee even though he turned off his gas.
My point, I guess, being even homeowners are not totally insulated from being screwed over by outside market forces.
Heh wait till you go to replace the property/damage. Unless you're doing yourself you'd absolutely crap on the floor once you see how high prices have got for this work.
Add to this the increasing incidence of weather/climate related damages to homes and the situation isn't looking good for many states.
Insurance company profiteering is a disaster but that's a whole different topic.
But remember that rental properties are also insured. And the renter is paying for that insurance, it's just bundled in the rental price. So renters are also paying the wild insurance hikes.
And utilities like gas are generally directly paid by renters, so no difference.
Aside from what you've mentioned, the state can raise the efficiency standard to protect the environment, raise the cost of services, or make you pay to rebuild the street or sidewalk in front of your home. Then come the maintenance: new roof, new windows, new kitchen and so on.
If your country has good tenant rights, there are not so many reasons to buy. It's better to invest the money for a while.
I thought this was only a problem in CA or FL. I wonder if this is nationwide or specific to states with disaster prone areas.
I guess once the mortgage is paid off for whatever reason you’re welcome to not get insurance.
I had a not so fun experience with switching insurance providers at about the same time that my bank was about to make the insurance payment out of escrow.
The house I have is pretty old and the roof had some issues. I obviously was planning on fixing those, but it became a bit of a catch-22 problem; the insurance I was planning on using (cuz I had a discount from my employer) said that they wouldn't insure me until the roof was thoroughly fixed and/or replaced, but I couldn't fix the roof until the deal closed, and the mortgage company wouldn't close the deal until we had insurance. We were afraid we'd have to pay the insane insurance rates from the mortgage company.
Fortunately, after multiple days of shopping, I found one insurance company that agreed to insure me as long as I fixed the roof within 30 days of closing, which I did.
The GP is pointing out a key advantage of buying your primary home vs. renting: you're not exposed to the risk of rising rents. Others have pointed out disadvantages, such as being exposed to the risk of rising property taxes and rising insurance costs. How those things balance out is going to depend a lot on where your home is.
It’s not just a forced savings plan. That isn’t to say it’s for everyone, but it’s important to get the nuance.
(Also, it’s not really fair to say an “irrational” emotional attachment - that attachment can generate great joy and a sense of ownership, those are real things and not irrational even if they don’t make someone more money. It’s totally rational to optimize for things outside of money!)
PS: From context, I suspect you meant to say "illiquid asset".
I think it makes it worse.
I never understood that part. Barring actual damage that would necessarily affect its worth it's still the same house.
Or in other words: why should I care what others think my house is worth when I'm not selling, as I currently live there?
In my corner of the world banks are required to assume a 2,5-5 percentage point buffer when calculating mortgage eligibility - the upper bracket is for variable interest rate mortgages. An unlikely scenario, but keeps the risk of what you mentioned low.
What a house is worth is what someone else will pay you for it. There is no intrinsic worth to it.
It's value is only what people will pay for it.
For example, a relative of mine died some years ago. She had a house full of expensive furniture. You couldn't give that furniture away, even though it was in perfect condition. It had no value.
The average estate value, excluding land, houses, and cars, is about $900. I have friends who ran an estate liquidation service. You'd net something like 5 cents on the dollar.
This is one reason why I buy stuff at the thrift store. I bought a perfectly good chainsaw there for $10.
The marketplace valuation is just where individual suppliers' and demanders' valuations cross.
The individual valuations are the foundational reality, or the market wouldn't work.
Every time you buy, sell, or decline to sell or buy something, you are operating based on your own valuation. So there is nothing theoretical about it.
People find out it is true when they try to sell something.
> If you wouldn't sell your house for $1M, then it is worth $1M to you
If you're willing to pay $1M for it, then it's worth that to you.
Most people think: "I bought my house for $200,000 and sold it for $300,000, I made $100,000!!!!!" and neglect to do a proper accounting.
If I take a leveraged position on a stock via margin trading and the stock goes to $0 (or, more realistically, it dips in value enough that I get a margin call) then I owe the whole balance, not just what I put up as capital. This is true of literally any leverage. And on top of that, I pay a margin rate in the form of an interest payment based on the amount of money I have outstanding beyond my capital. Sounds familiar, right? Because it's exactly identical. The only difference between a mortgage and a margin interest payment is that a mortage is amoritized across the term and is a fixed period, whereas margin interest is indefinite and acts more like a HELOC (i.e., you only pay interest on the amount that you have outstanding... and that amount can vary over time).
I absolutely hate the idea that "paying X in interest means that's money you have to earn in addition to make it worthwhile". No, it's not. It's money you are paying to free up extra capital elsewhere that can be invested more efficiently. Unless you're spending well beyond your means (which, admittedly, some people do), then paying interest on a mortgage payment should mean making much much more elsewhere by investing money you would have spent on buying a house in cash.
No, it doesn't. Because the alternative was renting, which isn't free.
Even if you end up losing 50K on the home, all told, but if renting for the same number of years would've cost you 100K, you're ahead by 50K.
Most people might not do the proper accounting, but not in the direction you suggest.
Maybe they made 100K gross profit but after deducting all the expenses they only made $1000. Ok, was that bad? No, it's great because the comparison is to renting where they would've lost tens of thousands of dollars.
Meanwhile, Microsoft stock is about 10x over the last 10 years. Transaction costs are minimal. I can sell it on a moment's notice. I was paid dividends. No insurance costs, no property tax, no maintenance.
I just had to replace the roof on my house. Wow, that was a whopping bill. The roofer told me if I'd delayed another year, the bill would have been a lot higher, as he would charge $150 per sheet of plywood replaced. As it was, only one was water damaged bad enough.
If you manage to pick Microsoft in 2014, Apple in 2000, Tesla in 2015 and BTC in 2010, you are definitely way better off not buying a house but keep renting.
Average home price since 1965: https://fred.stlouisfed.org/series/ASPUS
Average Dow Jones index since 1919 [adjust scale to ~1965]: https://www.macrotrends.net/1319/dow-jones-100-year-historic...
So under-building in the future will be harder, as houses exist.
Of course, it's hard to know how population growth will work out in the future. And even harder to know how it'll work out in your neighborhood :D
Do not compare your house to other investments, that's as apple to oranges as it gets.
Compare it to renting, since you have to live somewhere.
And home insurance, too. But generally, yes: over the course of decades an American fixed-rate mortgage really is a wonderful thing.
There is also the possibility of deflation to worry about, although deflation comes with many other problems. I personally think that worrying about deflation is like worrying about a meteor, or the collapse of the local government: if it happens, so many other bad things will also happen that my mortgage will be the least of my concerns.
The further you get from the initial purchase date the dollar will have a lower value, and in theory you should be making more money.
Plus, even tbills are returning over 5% and are state tax exempt.
But I agree that most debt is probably bad to have.
I always thought the snowball method was dumb but as time goes on I can see how it makes sense psychologically, even if not mathematically.
What I didn't like about his take was that it also kind of also excluded getting into like $20,000-$40,000 of debt to go to a decent state school. That's a bad take; getting a degree (at least in a technical field) substantially increases your earning potential, and while $40,000 is a lot of money, it's not out of reach for virtually anyone working in tech or engineering or something adjacent, at least not in the US.
I guess my frustration with his perspective is that it felt extremely reductive; he acts like the only student loan debt you can get into is Harvard-level stuff, but I think that's just not true, and not even the average case. Most people don't get into Harvard, (I think) most people who go to college end up at a state or local university, and as such they're not getting into the obscene levels of debt that you'd get from these yuppie private schools, particularly if they state within state.
You can easily get well into the 6 figures of debt even at state schools now. You'll find even rando state universities are hitting $30k+/year. Education costs have done exactly what you'd expect them to do when you convince people something is priceless and then give them unlimited and near unconditional loans to buy it.
I don't really see the point in this when you can instead attend English language programs in e.g. Europe or Asia and pay less for your entire education than you'd pay for a semester at rando state school in the US. Do a work-study program and you could graduate with a tidy chunk of change saved up, instead of graduating buried in enough debt to buy a house.
The ironic part is that this advice is even more pertinent for those coming from low income backgrounds, or from parents with limited education. But they're probably the people most unlikely to take advantage of such options, if not only because they probably just don't consider it.
of course the degree matters. You pay about the same for art and engineering degrees but one will earn far more than the other.
He acknowledges this. It's about the psychological effect of seeing your list of debts grow smaller. I think a big part of his audience are people who have historically been very bad with money, which is why some of his advice seems strange to people who are already financially responsible. People with a bunch of maxed out credit cards and loans on ATVs and crap.
If your loans have a minimum payment and a penalty for missing a payment above and beyond interest (which seems to be common for loans in the US), the snowball method gives you more flexibility. Paying off a loan completely eliminates that part of your monthly minimum payment.
If in 2 or 5 years your income decreases unexpectedly (layoff, etc.), but by that point you've completely eliminated 1 or more loans, you're more likely to be able to continue making minimum payments.
The author on paying down his mortgage:
> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.
This only works in places with fixed property tax. When I lived in Texas my property tax went up hand over fist every year as my property increased in value and automatic reassessments occurred. If your salary remains relatively stagnant and does not increase with cost of living (most salaries are subject to this) then you can certainly find yourself being subject to nuevo rent rates as a long time mortgage holder.
I do agree with you that different types of debt should be classified differently.
Rent has increased 30-50% where I live over the same time period. At least when my property tax increases, it's because I have an asset that has increased in value. If I am at some point forced to sell because I can no longer afford the property taxes, then I'll walk away with more money than if I had been paying rent for those same years.
Property taxes can force the same type of relocation that rent increases cause, but I think the typical outcome from someone being forced out by rising property taxes will be better than the person forced out by rising rents.
Critically, this also only works in places that offer fixed-rate mortgages. In my country (and most of Europe I believe) they are relatively expensive and the rate is fixed for only ~5 years (after which you either change to floating or update the rate). So basically nobody considers them long-term. Damn, I envy Americans.
debt for productive activity in general makes sense if it isn't compounding (mortgages act like simple interest, btw, although it's complicated since you pay more interest at the start of the loan and so if you move within the first five years you've paid almost entirely interest on the home)
debt for consumption is always parasitic
that's why it's insane how hard it is to get a business loan and how easy it is to get a credit card: usurers want suckers, not shared risk on productive investments
Has there been a 20 year stretch of time in the US in which housing is broadly a depreciating asset?
Seems that land is definitely, and housing for the most part, an appreciating asset over time due to scarcity.
The Great Depression started early for farmers...
https://ag.purdue.edu/commercialag/home/resource/2023/08/the...
you are asking if real estate prices have fallen over a 20 year period in the US and the answer is not in the modern inflationary era:
https://fred.stlouisfed.org/series/QUSR628BIS
but that mixes land & housing prices together of course
prices have fallen over 10 year periods (sometimes dramatically) however, and the average length of ownership is 8 years, so timing can make a huge difference in outcomes of home ownership, particularly with the leverage involved.
For many, taking on debt in 2018 to buy a house for 200k would have paid off greatly by selling in 2022 for 500k. In an inflationary environment, you should grab as much cheap debt as possible.
The goal is that by the time you reach retirement age, you have paid off the mortgage and own your home free and clear. Thus, you only have to pay the property taxes and have more financial security than someone who never built up equity because they always paid rent.
Furthermore, if you have children, that home is potentially a source of generational wealth. They can sell it after you pass and invest the proceeds, or live in it themselves if they want. Worst case, if you find you didn't save enough for retirement, you can tap into the home equity to keep food on the table, although this is not optimal.
So my plan if I move is exactly what it sounds like: I sell the house and then buy a new one wherever I'm moving to. As long as I'm staying for like 5+ years at that location I think it's still worth it.
In any case, if they move, then the price of the home they are selling will have gone up (or down) more or less the same as everyone else's, so it basically works out to a wash.
I actually find piece of mind in renting. I can always say screw it and move to the cheapest part of the country as I am getting closer to retirement age.
As you get over retirement age medical expenses could dwarf all these. you need to be more than debt-free you need to be debt-free and a good cashflow and emergency funds you can call on.
Just as you get to the top of the hill there is always another one to climb.
Money on rent goes to pay for someone else’s appreciating asset you don’t own.
Insurance isn’t that much and you have to pay taxes multiple times on all your money anyway but at least property has a chance to fight back a bit or hopefully outpace inflation.
The money you earn today and sits in your bank is going to be worth very little in terms of spending power by the time you want to move somewhere cheap if you’re not keeping it in investments or property.
We’re entering a dark time financially and there will be a significant quality of life difference in 20 years of those who have money in the right places today.
Something similar to this is why I prefer renting and why anyone who unshakeably believes renting is “throwing money away” is immediately suspicious to me.
I’ve always tried to rent the cheapest (some would say crappiest) apartment in an area that I’ve really wanted to live. I’ve done quite well financially and in terms of lifestyle as a result. I would’ve done better financially by buying a home somewhere I don’t want to live, but what’s the point?
I can't liquidate my house piecemeal when I need money like I can my brokerage assets.
You can withdraw from your fund if you have a hardship but it is generally considered best to not touch it.
For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don't have the cash for a house, I can't afford a house. In those terms, I can't afford a house right now, so I've been renting the whole time.
I think it should be the social norm for the median income to be able to buy a house with cash. For that to happen either people need to be making $1M/year median, or house prices need to come down to 1/5 of what they are.
But given that you need a home, what's the difference between $1000 in rent+fees and $1000 in mortgage+taxes+fees?
Normally the biggest difference between renting and buying with debt is that you can stop renting. But you're not going to stop having a home.
I think even if you choose not to use debt as a mechanism, you should understand why it's used as a mechanism, much like the parent comment has. Debt as a mechanism is not a bad thing - there's ample proof out there that availability of credit is an extremely strong indicator of future economic activity at the macro level.
As I understand it, sharia law forbids paying interest, so a conventional mortgage is not an option for adherents. However, several different mechanisms are allowed by which the purchaser gradually gains full ownership of the home. E.g. one is roughly equivalent to a rent-to-own agreement. The financier still gains a profit that reflects the risk their upfront investment is subject to.
What I find interesting is a recognition that some people need a lot of time to attain homeownership, and it may be valuable to let them live in the home before they fully achieve it, despite the outright rejection of lending as the mechanism.
For most things, that's a wise philosophy. Going into debt for something that depreciates like cars or furniture or electronics, is not wise.
Housing is different though for several reasons. One is that you must live somewhere. So (unless being homeless in an option) you have to pay for housing one way or the other. So you either buy (build equity) or rent (a pure expense). Another reason is that a house may (often does) appreciate in value so you're leveraging that debt to make money. Even if it depreciates, it hardly ever depreciates faster than paying rent. Another reason is that rents always go up, a mortgage locks in your cost for the next 30 years.
Or a bit more precisely, for the time the mortgage is running, you and the bank are essentially co-owners, and you rent the share you don't own from the bank (that would be the interests) while at the same time, you buy the bank share bit by bit (that would be the principal). At the end, you become a full owner and stop paying "rent" to the bank.
Think of people who owned houses in declining industrial cities. The local economy went bad, their house value went down and they faced a barrier to moving since they couldn't sell, move, and get a comparable house in a city with better prospects.
> It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it.
I consider that to be (mostly) pernicious nonsense, like ‘it’s okay to walk off of a cliff, if that works for you.’ To a very great degree, finances are a mathematical/legal reality: the path of wisdom is to adjust one’s emotions to that reality rather than to imagine that reality matches one’s emotions.
There is some degree of truth to it, of course: at the end of the day, life is not about maximising one’s finances, and one’s emotions definitely have a role to play in one’s happiness. But the sooner one learns to defer immediate gratification, save for the future and build up a nest egg, the happier one is likely to be.
He had a fixed income that would easily cover his living expenses. He had an investment portfolio that he is planning to pass on to his family.
By investing his cash and getting a mortgage on his home- he certainly would have made enough money to cover his mortgage on interest. But, he'd be at risk of going cash flow negative, and having to liquidate some of his investments to cover his mortgage + lifestyle.
He knew that having to liquidate investments would bother him- it'd be a lot harder to justify that vacation if he'd have to sell some stocks. Those stocks are for his family in his mind.
By buying that home outright, he now knows that he's going to be cash flow positive for as long as he's alive. He'll never have to dip into his stocks. And he'll never have to stretch a dollar.
It's not a strategy that you'd come up with on a spreadsheet, but he's one of the happiest guys I know
When I got my home I went crazy trying to pay it off as fast as possible. I did it in 30 months and it was the best feeling in the world. I deferred my immediate happiness on many things for almost 3 years to hit that goal and it was euphoric. Since doing that, I’ve been able to increase my savings rate dramatically. I save much more now than I would be saving if I still had a mortgage and made minimum payments. My net worth jumped up considerably during that period, since I had a clearly defined goal just around the corner it was easy to give up more for it. Now it’s easy to give more to investments because I don’t really want for anything and my expenses are low. When nothing is competing for your dollars it is easy to start stacking them up. I was also maxing out my 401k while paying off the home, so it’s not like I wasn’t investing or completely out of the market.
Most people paying the minimum on their “good debt” aren’t aggressively investing what they otherwise would have applied. They’re spending the money and have nothing to show for it at the end of the day. The potential investment is the justification to not pay the debt, but it’s not the reality of what they’re doing.
I find a lot of peace knowing that if something happens to my job, I can probably get a job just about anywhere and still make ends meet. My emergency fund also went from 6 months of expenses to 12 months without adding another dime, but by eliminating my biggest expense.
Another thing I thought about a lot was the 2008 crash. If I were to not pay down my house, and invest instead, I could still end up in a situation where I lost my job and with the markets down, couldn’t afford to stay in or get out of my house if needed. Paying it off eliminates that risk. Property taxes for the whole year are about equal to 2 months of rent in most places around me.
I love businesses that are 100s of years old. They may not be the biggest, but they don’t need to be huge to weather the storms of life, they just need deep roots. That’s what I want for my life. Stability. Investments can buy some flexibility when times are good, but a paid off home will give me a place to rest easy when times are bad.
That was a special series on the topic.
Quite often they do have a list of prepared questions, and send them to guests ahead of time so they are somewhat prepared: depending on the answers they may delve more deeply into some answers.
The hosts (Ben and Cameron) also do prep ahead of time: they read the books—and more often research papers—of the guests, and so already know to a certain extent what they're going to say before they ask. The guests' answers are more for the viewers/listeners, and give the guest an opportunity to perhaps comment more 'free-style' than what can be written down.
in contrast, this brief blog post by Morgan Housel gives a small visual metophor and a rule of thumb about how too much debt might be fatal when operating a business. arguably it teaches you something actionable, but doesn't tell you anything about your society.
Graeber's book is not at all concerned with giving you actionable advice on how to best use (or avoid) debt to run a business within your society.
that said, Graeber's book may give you some actionable advice on how to get along better with your neighbours, family and community. the tip would be: try to have everyone in the village owe each other debts. the idea is everyone should feel they have some obligation to others that they can never fully repay, but maybe they can return some other incomparable favour or assistance in future. this encourages cooperation.
trying to fully repay or balance these debts would be frowned upon -- such behaviour is what one might do if one were seeking to not participate in society any more. not pro-social.
I found this book, The Price of Time by Edward Chancellor [1], very useful for understanding the development of money and debt over history. It's so detailed and clearly extensively researched.
But popularity doesn't validate or invalidate its content.
they made a few mistakes, and after correctiona their findings are not reproducible
https://www.vox.com/future-perfect/2024/1/11/23984135/inequa...
https://marginalrevolution.com/marginalrevolution/2023/12/th...
Chancellor's axe to grind is clear, that manipulation of interest rates by central governments has led to economic instability. Yet historically emperors, kings, and other rulers would periodically wipe the slate clear because debt enslaved too many people causing instability.
Read Graeber's book. It's better researched.
Have you read the book? Cause this is such a simplistic reduction of the book, I can't help to think that YOU have an axe to grind.
Do you mind elaborating on why this is the case? I've read and liked some of his other work (Bullshit Jobs is a great one) and I have Dawn of Everything on my reading list -- was it due to his politics in general or because of disingenuous interpretations of the evidence?
A good example: Graeber posits that the European Enlightenment came directly from contact with Native American ideals rather than being a home grown movement. To support this, Graeber repeatedly references a book written by a French Army officer named Lahontan about his travels in North America in the late 1600s[0]. In this book Lahontan has dialogue with a fictional Native American named Adario that is more or less a disguised critique of European society. Adario bears similarities to Iroquois Chief Kondiaronk[1]. It's thought that Adario was a literary device for Lahontan's ideas but Graeber makes a very hand wavy argument that Adario was actually Kondiaronk and the dialogue was real. Graeber then uses this as his main piece of evidence to support his theory about the origins of the European Enlightenment.
I couldn't finish the book because I kept looking up the evidence Graeber was presenting and it usually ended up like the Kondiaronk situation.
Graeber is also very condescending when he's writing about ideas held by other anthropologists (like Jared Diamond), it was off-putting and came off as unprofessional for someone who was supposed to be a leading academic.
[0] https://en.wikipedia.org/wiki/New_Voyages_to_North_America [1] https://en.wikipedia.org/wiki/Kondiaronk
When I read the criticisms in the press and blogs about the work, I found it telling that most of the criticism about Graeber and Wengrow's book is from non-experts. While experts seem to find it a breathe of fresh air.
I personally don't have enough training and education in anthropology and archeology to properly interpret the evidence. I suspect most readers here do not. That's why it's such an important work, because it synthesizes the latest research. Turns out a lot of it is counter to a lot of contemporary works that don't rely on such depth.
Here I definitely take his condescending / snarky tone with a grain of salt, but as a reader I understand it as largely a literary technique to build a narrative and suggest / propose an alternative, usually somewhat contrarian, viewpoint.
I can't at all disagree with you here re: Dawn of Everything, as I haven't read the book, but is it at all possible that -- given we're analyzing the reported history of indigenous societies and the book talks about a proposed alternative viewpoint -- some level of "matter of fact"-ness works in a similar way as a literary technique? In this context it seems impossible to truly make a definitive claim one way or the other, as we're talking about histories for groups of people (who were largely extinguished by invading colonialist armies; Guns Germs and Steel and all that...) that are no longer around in serious enough numbers to have an oral history, let alone a quasi-accurate one.
https://en.wikipedia.org/wiki/The_Dawn_of_Everything#Recepti... seems largely like reception was a mixed bag, and that while there are parts that are a bit of a stretch, most anthropologists and reviewers found it a refreshing read contrary to the "canonical" (imperialist) narrative(s) commonly taught in history class. Is it as "mixed" from your read as that Wikipedia summary says, or do you find the discrepancies/inaccuracies significantly more egregious than the way I'm characterizing them?
For some reason economists seem to gloss over that money doesn't abstract over just time. It abstracts over everything including location, trade partner, the specific commodity being traded and minimum quantities.
Since people involuntarily produce liquidity by bringing their goods to the market, people owning the rights to that liquidity (aka capitalists) can "reap where they haven't sown".
This leads to a paradoxical situation. Liquidity production is work like any other. In short, liquidity production demands to be compensated. Since the holders of liquidity can utilize the benefits of the liquidity services without paying they can either decide to use the liquidity benefits themselves or they can decide to monetize them by selling liquidity on the capital markets. The compensation for this liquidity service is known as risk free interest.
As I mentioned, liquidity demands to be compensated, but since the producer of liquidity does not get paid, they will eventually wisen up and cease producing liquidity in the national transaction network. This leads to production capacity in the economy being dismantled since it represents a commitment in time-commodity-quantity-person-space. Instead, future producers of liquidity await the holders of liquidity to effectively signal their demand so that they know to what production process they should commit to.
Since information acquisition is costly, it is perceived to be cheaper to avoid committing oneself or in more direct terms: interest measures the reluctance to lose control over ones capital.
Also would recommend Money: The True Story of a Made-Up Thing:
> Money only works because we all agree to believe in it. In Money, Jacob Goldstein shows how money is a useful fiction that has shaped societies for thousands of years, from the rise of coins in ancient Greece to the first stock market in Amsterdam to the emergence of shadow banking in the 21st century.
> At the heart of the story are the fringe thinkers and world leaders who reimagined money. Kublai Khan, the Mongol emperor, created paper money backed by nothing, centuries before it appeared in the west. John Law, a professional gambler and convicted murderer, brought modern money to France (and destroyed the country's economy). The cypherpunks, a group of radical libertarian computer programmers, paved the way for bitcoin.
* https://www.goodreads.com/en/book/show/50358103
And The power of gold : the history of an obsession (and Bernstein's other books):
> Incorporating myth, history and contemporary investigation, Bernstein tells the story of how human beings have become intoxicated, obsessed, enriched, impoverished, humbled and proud for the sake of gold. From the past to the future, Bernstein's portrayal of gold is intimately linked to the character of humankind.
Respectfully, this is the type of true-that-sounds-deep statements that are absolutely shallow and pointless. Yes money the "paper" is not worth anything, but the same could be said of anything in an organized society. Ownership means nothing, it's just a title backed by the government which has a monopoly on violence. Ethics means nothing, it's just something we culturally decided was desirable because if you feel a-ok with murder any trip anywhere would turn into a blood bath.
At this point it should be a named fallacy (maybe it is), if we are discussing the merits of debt as a tool, saying "money isn't worth anything" as if it means something is not some ground breaking statement.
And yet people still insist on the idea that money (or, quite commonly, gold) does have some kind of intrinsic value. The statement may be trope-y, but it's a psychological hurdle that many folks can't seem to get their head around.
I'm pretty sure there's a joke about there being three types of economies: developed, undeveloped, and Japan.
Cash is useless if the value of the cash goes down by 10,000% and you don't have an inflation adjusted revenue stream. You have to do something with the cash to get enough interest to keep up with inflation.
Asset allocation is of course extremely important, but the main point made in the article is not having debt
If everything they have is paid for, and people are still buying stuff from their business, their prices can adjust with inflation. Some of their cash might get devalued in a period of hyper inflation, but if they still have enough to get by, as well as new sales, they should be ok. They hopefully also diversified their assets in some things that will handle an inflationary period and don’t just have mattresses full of money.
But yeah, cash is really just a call on the local monopoly on violence, which changes all the time over the long arc of history. Terrible long term store of value.
Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if markets fall meaningfully, and ultimately you are living in a house that the bank owns while someone took your money and replaced it with IOUs.
If you’ve invested in volatile titles that can be a problem. But if it’s a bond, it’s quite stable and doable.
And unlike a car insurance that only covers your car and only in specific cases (ex: crashes are covered but not mechanical failures), cash covers for everything up to the value you have available. It doesn't mean you shouldn't get "proper" insurance, there are extreme events you would need way to much cash to cover (ex: civil liability, health,...), just that cash can be counted as insurance.
I was talking about the more expensive insurance policies that cover "all risks", including theft, vandalism, or damage to the car due to weather or accidents where the owner is at fault.
For high-income people, debt is a powerful tool.
The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.
See youtube channel 'CalebHammer' [0] (he does financial audits for those that are in financial trouble) of mistakes the regular people make. It can be quite painful to watch.
How?
Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock.
If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period.
It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt.
Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate.
So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k.
In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill.
This is how people with assets can use debt as a tool.
Here's an example that could be achievable without needing to be a super high wealth individual, but does require being able to pay a few thousand dollars up front with little notice.
Let's say you get hit with a $3,500 medical bill. The hospital says they're willing to reduce it by 20% ($700) if you pay up front so now your bill is $2,800.
Now, let's say you rarely use credit cards and a major bank will give you $750 cash as a bonus if you spend $4,000 in 3 months. With the medical bill and regular spending you can hit that without making any "extra" purchases.
You could sign up for that card, immediately pay off the $2,800 to avoid paying any interest on the card and once you get the cashback bonus it's really like paying $2,050 instead of $3,500. Now you can take that $1,500 you saved, invest it at 5% for 15 years and with compounding interest you get back +$1,500 profit (minus taxes) which essentially means your medical bill was $500.
Of course this requires luck and timing around being able to do that with the card but even if you didn't have the card bonus you can get a guaranteed 20% return in 1 year by paying it off. The alternative is paying the full amount in smaller payments. Technically a lot of hospitals don't charge interest and give you reasonable plans to pay it off but most other places will charge you interest.
Poor people can't do that - they need all of their cash now just to live, all the time.
(That latter part can happen even with very high incomes. It's not unheard of for e.g. professional sports players or celebrity actors making millions to take on way too much debt and ruin themselves, especially because their high income can disappear quickly, e.g. due to an injury)
jokes apart, some great replies explain how.
BTW rent is not much different from a loan. You just do not pay principle.
You are either way paying to use someone else's asset(s).
If you hold a lot of savings, others had to get into debt to create the money that ended up in your bank account.
If EVERYONE decides to hoard cash, then the economy goes into a deflationary spiral and everyone's ability to save goes to zero. This is called the Paradox of Thrift.
Many folks on HN have huge savings accounts. Thank those that went into debt so you can have savings. They sacrificed their resilience for you to have yours.
Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.
I recommend reading the Bank of England's Money Creation in the Modern Economy
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt.
Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.
If I stop saving, it won’t make their life better, it will just make my life worse.
I want to have opportunities to create my own business, make profit, enjoy profit, hand modest generational wealth to my descendants and die without regrets.
Thousand year business are not the way to achieve my goals and my goals are not incomplete with debt.
I hold debt on my house. My future is tied to that debt and I wouldn’t have it another way (I mean unless you want to pay off my house).
Let me introduce the Shokunin (translated as Artisan, when you look it up on Wikipedia, which isn't quite right).
What a Shokunin produces is, sort of, the antithesis of what you can order from Temu.
A rather interesting blog post[0] explaining the concept:
"Shokunin is more than just a craftsperson or artisan. It represents the devotion and lifelong commitment of craftsmen who dedicate themselves to perfecting their art. They embody the values of dedication to craft, excellence in craftsmanship, and masterful work. Shokunin believe in meticulous attention to detail and uphold the highest standards of quality and skill in their work."
For us Westerners it's not fathomable to work 20 years, or a lifetime, ro achieve a perfect product. Who's to say that this concept is wrong?
And I think it has a lot to do with a society who believes that a 1000 year old company is not only desirable but a virtue.
[0] https://tobyleon.com/blogs/art-design/shokunin-japan-artisan...
You don't want to work at your grandpa's company, fine. This advice may not be for you then. That doesn't make his premise any more flawed than your own.
And FWIW a thousand year old company does not require that it stay within the same family - which is from your (flawed) assumption. In your own example of "creating a business, making a profit, and handing down wealth to your family", one of the ways to make that profit is to sell your business to someone else, who may sell it to another (on and on for... a thousand years).
So not only are you claiming he's wrong based on an opinion you have, your opinion isn't even contradictory to the point he's making.
An absorbing barrier is like going all-in on a hand in poker and losing - you lose your entire bankroll, are out of the game, you stop progressing and have no more iterations. Your E[X] no longer incorporates the set of all possible steps or outcomes (ensemble average), but only the ones you actually experienced before incurring the absorbing barrier (time/path dependent average). As a result your real-life E[X] materially differs from your theoretical one.
The lesson is that long-term survival should anticipate absorbing barriers, prioritize avoiding them, and build deep buffers against them (cash on hand, etc).
[1]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance)
[2]:https://ergodicityeconomics.com/
That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events.
As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from an affordable mortgage, but I avoid taking debt for other goods that are less important and would limit my ability to withstand unexpected events and accidents
What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%.
Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe to consumerism.
> That is of course extreme
I don’t think that’s even that extreme. In 2020 the market crashed something like 40% and at the same time vast swaths of the population became unemployed. All of my grandparents experienced the great depression. We will be very fortunate if we aren’t heavily hit by war or economic disasters for the rest of our life.
Most people pay extra to mortgage gradually. Until it is paid off, they face the same risk of foreclosure. What happens if you lose your job with one year left? You lose the house, you can't pay your bills cause banks won't give you home equity loan.
Liquidity is more important for most people than returns. Money saved in a house is a huge risk.
That describes the old-fashioned company that I worked for. They are only a bit over 100 years old, but they are cheap bastards. I learned how to work quite frugally, under them.
I've always hated startups where I've worked, that burn through HUGE sums of money (per-profitablilty) on expensive coffee/snacks/foosball tables. I feel like proverbial old man (The Simpsons) shouting at the clouds: "You know that fancy coffee you're drinking? it's future diluted equity!"
Of course, maybe there are ranges of being "cheap bastards". :)
From what I hear, most places that have foosball tables, have about an inch of dust, on said table, because they have all their employees burning out their eyeballs.
It seems there would be a gap in the market for a loan whose payments increase either at or above inflation (perhaps this does indeed exist and I'm simply unaware of it.). Rent doesn't stay flat over a decade time period so why should mortgage payments?
In India, for example, debt is a last resort means that comes with contempt and social taboos. Yet people have no choice, but to avail debt.
In practice there are countless important complications that make a naive option theoretic analysis very incomplete, e.g., getting into debt makes a lot of sense if you can count on a bailout if things go pear shaped.
How does he reconcile the fact that the companies he lauds in the beginning, would completely shun any business with him (an investor) for precisely the reasons described?
I feel like investors and VC are unaware of their own values
There's a difference between business finance and personal finance. There's a difference between what needs to be done to start a business and what needs to be done to keep it going.
Apple started in a garage, but it is no longer run out of one. Apple started with loans and investors, Apple now has a large pile of cash (though also bonds that it needs to pay).
> Let’s say this represents volatility over your life. Not just market volatility, but life world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc.
And further down:
> I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps?
Not sure how many businesses experience divorce, family emergencies, career transitions, wayward children.
Debt limits choices. But, one can still make a choice that expands their liberty.
Having a stable home, being able to go to college, etc. are good uses of debt.
Buying a flashy car purely to impress the neighbors? Maybe not.
Even if a specific type of debt load is not necessarily a liability for personal profit, it is assuredly someones problem eventually...
The theory debt doesn't matter only applies to 0.04% of the population dodging tax burdens with structured financial instruments. The interest rates should be set over 14.2% (and we know it), as aristocratic gambling-culture has stolen living-standard value from great-great-grandchildren not even born yet.
The poignant question is 'could anyone do anything about the trends', and the short answer is a simple 'No'.
https://en.wikipedia.org/wiki/Tragedy_of_the_commons
Have a great day, =3
I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life.
In my opinion, creating financial securities out of communities just turned most cities into theme-park economies. Fun, but innately unsustainable for all visitors except the board.
Personally, I have found the contradictions formed between macroeconomics and microeconomics fascinating. Primarily because tragedy can be profitable in a global context, but destructive from a personal perspective.
"Do you want to be right or do you want to be happy?" (Phillip C. McGraw)
"Mankind does not strive for happiness; only the Englishman does". (Friedrich Nietzsche)
“sing the song of him who gives you bread”
when you have cash you do what you want. when you have debt you do what someone else wants.
It's like how almost nobody thinks of themselves as Evil. Everyone is doing their best, but nobody has the same yardstick.
1. Use it to account for the mismatch between income and expenses.
2. It takes money to start a business. You can borrow and start the business now, or save up for N years and then start. Same thing for buying a house.
3. If you can borrow money at 5%, and invest it at 10%, you make money.
Using debt to buy frills, though, is not a great idea.
I also use margin debt to increase my stock purchases. The returns are larger, but I must also endure wilder swings in the value. Some people say "what if the stock market goes to zero, what then, huh?" My reply is if the stock market goes to zero, everything else has gone to hell including whatever other investments you have.
I also like the book "Debt" by Graeber. Different, but very eye opening.
If your business is moving along just fine and you have a decent cash reserve, what opportunity cost is all that important? FOMO doesn't seem like a good thing to let influence business decisions.
"We are $4.25 million in debt but live care free vacation filled lives bringing in $40,000 a month"
If it’s at a floating rate, it might still be a good decision. But right now some business loans are up around 15%, at which point the situation above would be an absolute catastrophe.
Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.
That is to say, you owe them for those ten years.
Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.
>I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool.
I am, here's how I would add to this article.
How do you tell how in debt you are. How tight is the graph? Its not just your debt.
Your paycheque comes from your neighbour's spending. If they are in debt, then you too will feel their collective debt. Generally speaking debt is mortgages> cars> tuition. Not a great deal else.
So you can actually look at the public data.
Norway is 210% debt to income.
Canada is 178% debt to income.
The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. It's generally regarded that you keep this in the 30-40% range.
When these thresholds hit ~130% that's typical of a financial crisis. To reach 178% or above 200%... that's only possible if actions are being taken by the central banks to prevent a crash temporarily.
Checking Norway, because I don't know the state of their central bank. It seems Norway went bankrupt in the early 2000s? It has been a steady crash since being prevented by their central bank?
Private Debt to GDP in Norway increased to 277.90 percent in 2023
So here's the thing about central banks working to prevent crashes. You can do so of course, but you also need to deflate the risk. But all they are doing is inflating the inevitable pop. You're just making the crash worse over time.
> Canada is 178% debt to income.
> The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt.
You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock was directly comparable to a total income flow, which it obviously isn't.
The total interest due on the debt is the flow that you should be comparing to the total income flow. (Otherwise, if spending stopped at 100% debt-to-income, how could Canada and Norway's economy be working at 1.8 and 2.1 times that trigger threshold?)
My mortgage debt (the stock) is give-or-take 100% of our annual household income (the flow).
We have plenty of money left over each month to buy things, because the payments on that mortgage (the flow) are a sensible fraction of our household income (the flow).
That's what these numbers are.
I'm talking about a calculated popular metric many people use for many countries all over the world.
It's really not a controversial or debated subject for either of these countries.
https://tradingeconomics.com/norway/households-debt-to-incom...
That means for every 100 units of annual income, Norwegians owe 210 units in total debt. (Not total debt service payments [a flow, with unit of kr/yr], but total debt [a stock, with unit of kr].)